The Implicit Carbon Price of Renewable Energy Incentives in Germany

ABSTRACT

Incentives for the development of renewable energy have increasingly become an instrument of climate policy, that is, as a means to reduce GHG emissions. This research analyzes the German experience in promoting renewable energy over the past decade to identify the expost cost of reducing CO2 emissions in the power sector through the promotion of renewable energy, specifically, wind and solar. A carbon surcharge and an implicit carbon price due to the renewable energy incentives for the years 2006-2010 are calculated. The carbon surcharge is the ratio of the net cost of the renewable energy over the CO2 emission reductions resulting from actual renewable energy injections. The net cost is the sum of the costs and cost savings due to these injections into the electric power system. The implicit carbon price is the sum of the carbon surcharge and the EUA price and it can be seen as a measure of the CO2 abatement efficiency of the renewable energy incentives. Results show that both the carbon surcharge and the implicit carbon price of wind are relatively low, on the order of tens of euro per tonne of CO2, while the same measures for solar are very high, on the order of hundreds of euro per tonne of CO2.